How does equity crowdfunding work?

My answer to How does equity crowdfunding work?

Answer by Raad Ahmed:

Basically, equity crowdfunding is when individuals pool together usually small amounts of money into a company when the risks are pretty high. The payoff? They own a portion of the company. This type of funding used to be limited to wealthy individuals, but because there are so many crowdfunding platforms popping up, more and more people have the opportunity to invest in a startup and profit from that business if it does well.

If you’re thinking of incorporating crowdfunding, I’d encourage you to weigh the pros and cons.

Pros:

Your pitch to crowdfunding investors could help fine tune your marketing approach. You will learn right away what works and what doesn’t as far as gaining interest in your business.

A lot of startups feel like crowdfunding simplifies the investment process. You can simply find a platform that works for you and start attracting investors instead of using time and energy to reach out to investors individually.

You can have access to money faster. Assuming that you are able to attract investors with your idea, startups usually take about 90 days to get the money that they need from crowdfunding.

Cons:

Some platforms only release funds to you once you’ve hit a certain monetary goal of investment. This could potentially delay or even derail your financial milestones.

This approach is usually focused on startups that require less capital (Think 100K or less) so if you’re business requires more, this may not be the best situation for you.

It’s usually not idea for complex business models. Investors that are associated with crowdfunding usually like simple ideas that don’t require a ton of research or development.

Crowdfunding is definitely changing the game when it comes to startup investment. If you’d like to learn more about crowdfunding or other ways to find investors for your startup, you should talk to a business attorney.

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